At the close of Monday, July 27, 2026, the capital flow data for Hong Kong Stock Connect was released: Last week (July 20 to July 24), southbound funds net bought HK$38.26 billion of Hong Kong stocks, setting a new single-week high since the third week of April. Among them, Shanghai Stock Connect net bought HK$14.23 billion, and Shenzhen Stock Connect net bought HK$24.03 billion, with significantly increased activity in the Shenzhen channel.
Tech and High-Dividend Dual Main Lines Advance Together
From the perspective of individual stock capital flows, this week southbound funds showed a clear "dual main line" allocation characteristic. The first main line is oversold tech bellwether stocks. Tencent Holdings (00700), Meituan-W (03690), and Kuaishou-W (01024) received net buying of HK$3.25 billion, HK$2.81 billion, and HK$1.97 billion respectively, ranking top three in net buying. In addition, semiconductor sector's SMIC (00981) also received about HK$1.1 billion in net inflows. The appeal of the tech sector mainly comes from two aspects: first, since mid-July, the Hang Seng Tech Index has corrected over 8%, returning valuation to historical lows; second, many tech companies have announced progress in commercial deployment of AI large models, boosting market confidence.
The second main line is high-dividend central state-owned enterprises. China Mobile (00941) net bought HK$1.83 billion, CNOOC (00883) net bought HK$1.56 billion, and China Shenhua (01088) net bought HK$0.89 billion. These sectors feature stable cash flows and high dividends in a declining interest rate cycle, meeting the allocation needs of long-term funds such as insurance and pension funds. According to HKEX data, since July, southbound funds have consecutively net bought high-dividend Hong Kong stocks for four weeks, with a cumulative amount exceeding HK$28 billion.
Sector Rotation: Energy and Utilities Receive Increased Holdings
From an industry dimension, beyond tech and telecom, the energy and utilities sectors also received significant increases from southbound funds. Huaneng Power International (00902) and China Resources Power (00836) received net buying of HK$0.32 billion and HK$0.27 billion respectively. Analysts pointed out that the summer peak electricity demand coupled with relatively stable coal prices enhances expectations for improved profitability of thermal power companies. At the same time, the proportion of southbound funds' holdings in Hong Kong's utilities sector has risen from 3.5% at the beginning of the year to 4.8%, hitting a nearly two-year high.
Behind the Funds: Exchange Rate and Policy Dual Benefits
Li Ming (pseudonym), an analyst for Hong Kong stock strategy at Industrial Securities, stated that last week's surge in southbound funds was closely related to the stabilization of the RMB exchange rate and expectations of domestic policy easing. On July 24, the onshore RMB central parity rate against the USD rose to 7.12, a two-month high, reducing the cost of currency exchange for mainland investors. Additionally, after the People's Bank of China unexpectedly cut interest rates by 10 basis points in mid-July, market expectations for further reserve requirement ratio (RRR) cuts and rate cuts in the second half of the year have heated up, with loose liquidity driving funds south to seek higher yields.
From a global capital flow perspective, EPFR data shows that for the week ending July 26, emerging market equity funds saw net inflows of US$2.7 billion, of which mainland China and Hong Kong markets together accounted for 56%. This reflects that overseas funds are also simultaneously replenishing Hong Kong stock positions, resonating with southbound funds.
Outlook: Can It Continue?
Looking ahead to this week, many institutions believe that the net inflow trend of southbound funds is expected to continue. GF Securities pointed out that the current valuation of Hong Kong stocks is at a global trough, with the Hang Seng Index's P/E ratio at only 9.8 times, lower than the ten-year average. Meanwhile, southbound funds accumulated net buying of only HK$280 billion in the first half of 2026, down 18% year-on-year. In the second half, with increased domestic policy support and improved earnings of Hong Kong stocks, the trend of capital repatriation may accelerate.
However, risk factors cannot be ignored. The Federal Reserve will announce its interest rate decision on Thursday (July 30) this week. If an unexpectedly hawkish signal emerges, it could trigger a global capital return to US dollar assets, causing short-term disruption to Hong Kong stock liquidity. In addition, the Hang Seng Index faces overhang pressure near the 20,000-point level, and whether southbound funds can continue to push remains to be seen.
Overall, last week's strong performance of southbound funds established a tone of short-term market sentiment recovery. The "barbell" allocation strategy of technology and high-dividend sectors remains the current mainstream. It is recommended that investors closely monitor the outcome of this week's Federal Reserve meeting and daily changes in Hong Kong Stock Connect flows, and adjust positions flexibly.
